If you are a salaried individual, you would be busy with the annual ritual of finalising tax-saving investments during the first three months of the New Year. You can walk into your bank, enquire about tax-saving investments, and step out with a life insurance policy. You may even buy an insurance policy from your investment advisor who always impresses you by counting the infinite benefits of buying an insurance policy to save taxes.

In fact, insurance companies and their sales forces and banking officials work overtime to sell insurance plans during the tax-saving season. In fact, insurance companies clock most of their annual sales during this part of the year. Apart from the traditional endowment plans and regular unit-linked insurance policies (Ulips), you can expect these sales people to pitch unit-linked pension plans (ULPP) this year.

THE REINCARNATED PENSION ULIPS

At least three life insurers — HDFC Life, ICICI Pru and Birla Sun Life Insurance — have launched unit-linked pension plans in the last few months. This is significant, as regular premium pension Ulips had almost disappeared from the market post the Irda guidelines of September 2010. Last year, the regulator relaxed some norms, most notably the return guarantee linked to RBI's reverse repo rate. Insurers found it difficult to offer this return and policyholders, too, were at a disadvantage as a guarantee meant higher exposure to debt instruments, instead of higher-yielding equities.

Elimination of rigid guarantee a plus In the current regime, pension plans have to offer a non-zero , positive return assurance or promise an absolute maturity amount upfront. This has meant more flexibility for insurers to design their products. Hence, the partial revival in product launches. "Investors will get assured returns on vesting and death along with non-guaranteed bonuses in case of participating traditional plans. On the other hand, in case of pension Ulips, the equity component in the chosen fund option can offer higher returns. Investors should bear in mind the fact that it is a retirement solution . They should invest into it with a long-term horizon of 10-15 years in mind," says Sanjay Tiwari, vice-president , strategy and product, HDFC Life.

However, unlike pre-September 2010 pension Ulips, the equity exposure will be relatively curtailed as they have to offer some guarantee. "Freedom and guarantee cannot go hand in hand. Any form of guarantee by the insurer limits the freedom of the policy holder to switch between risky and secure assets. Yet, pension Ulips score slightly over traditional endowment or pension plans in terms of transparency — investors will be aware of the portion of premium being allocated , charges and exposure to equities. Also , they can monitor the pension fund's performance regularly," says Sunil Sharma , chief actuary, Kotak Life.

FLEXIBILITY A CONSTRAINT

While the Irda has capped the charges in Ulips, some concerns remain, say financial planners. "Lack of flexibility is a huge constraint. You cannot move out of the scheme if it is not performing well. You will either have to surrender the policy or stick around despite unsatisfactory performance. In contrast, in case of mutual funds or gold ETFs, you can switch between schemes easily," says Pankaj Mathpal, CEO, Optima Money Manager.

Also, you will have to compulsorily convert two-thirds of the accumulated corpus into annuities at the time of vesting. This will be applicable even if you surrender the policy mid-term . The annuities will have to be purchased from the insurer who sold you the pension plan. "Instead, investors could have used the corpus to buy a house which could yield rental income," he says.

TAKE AN INFORMED DECISION

Clearly, the product has its set of advantages and shortcomings. Therefore, do a thorough research before investing - buying a pension Ulip or any product, for that matter - in a hurry to save tax is a highly flawed approach. "You should ascertain whether the plan meets you requirements . Also, evaluate the performance of the previous pension funds. Ascertain whether it is a single or regular premium pension Ulip. Consider choosing a policy tenure of at least 15 years," says Susheel Tejuja, managing director, Landmark Insurance Brokers. He also cautions against factoring in only the first year allocation charge.

"Instead, calculate the charges spread over the entire policy term chosen and then look at the average cost arrived," he says. Finally, gauge its suitability. For instance, it would be unwise to pay premiums for a pension plan when you are nearing retirement . It is meant for relatively younger individuals . "This guaranteed (pension) Ulip product may not excite financially sophisticated customers who understand equities , due to the constrained equity exposure to manage the guarantees, particularly at an age when they can afford to take higher risk in anticipation of higher returns," adds Sharma of Kotak Life.